Federal investigators are probing a subsidiary of Caterpillar Inc. CAT +1.44% to determine whether it was dumping train parts into the ocean near the Port of Long Beach, Calif., as part of a possible scheme to bill railroad companies for unneeded repairs, people familiar with the situation said.
The Peoria, Ill.-based maker of heavy equipment disclosed in a securities filing three weeks ago that it had received a federal grand jury subpoena to provide documents and information on its Progress Rail unit, which repairs locomotives and railcars. But Caterpillar hasn't provided details about the criminal investigation or how it arose.
The grand jury investigation is being conducted by the U.S. Attorney for the Central District of California, based in Los Angeles. It is examining whether Progress Rail was dumping brake parts and other items as a way of concealing evidence that Progress Rail was charging owners of rail equipment for replacing parts that were still in good shape, these people said.
Union Pacific Corp., a major railroad operator, was one customer believed to have been affected by the alleged Progress Rail activities, according to these people.
The investigation is at an early stage, and such probes often don't result in indictments.
Disputes often arise between rail-repair shops and their customers over how much they should be billed and what services were needed. These disputes typically are resolved between the parties involved.
The U.S. Attorney got involved in this case because of suspicions that Progress Rail was breaking environmental laws, according to a person familiar with the situation.
In its disclosure three weeks ago, Caterpillar said it was cooperating with the authorities. "We currently believe that this matter will not have a material adverse effect on the company's consolidated results of operation, financial position or liquidity," Caterpillar said at that time.
Caterpillar acquired Progress Rail in 2006 for about $800 million. Progress Rail, which had its origins in the metal-scrap business, was founded by William P. "Billy" Ainsworth, an Alabama native who built up a nationwide business repairing and refurbishing rail equipment.
Mr. Ainsworth has remained head of Progress Rail. He oversaw Caterpillar's diversification into production of railroad locomotives via the 2010 acquisition of Electro-Motive Diesel, or EMD, formerly owned by General Motors Co.
Progress Rail is based in Albertville, Ala., and has more than 90 branches across the U.S. It competes with small independent shops as well as large railcar manufacturers, such as Union Tank Car Co. and Greenbrier Cos., that also do repair work.
Railcar owners, such as chemical producers and leasing companies, and the railroads hire Progress Rail to make repairs or replace worn brake shoes, wheels and other components. Railroad inspectors routinely pull cars out of service if they discover a problem.
Industry experts say repair shops that billed for more work than necessary were once common in the industry. But better monitoring of repairs and greater emphasis on standards for replacing parts have reduced the frequency of disputes between equipment owners and repair shops.
"There's more policing than there used to be," said Mike Francis, an equipment consultant from Texas who inspects repairs on behalf of railcar owners. "Twenty or 30 years ago, repair shops were like the wild, wild West."
Even today, Mr. Francis said, "the opportunity to take advantage of folks is high. If you're in Chicago and your car is in Florida and somebody says you need repairs, you don't know that. You're not there."
The investigation marks a possible second embarrassment in a year for Caterpillar. Last January, the company was forced to make a $580 million writedown in the value of ERA Mining Machinery Ltd., a Chinese maker of roof supports for coal mines, acquired in 2012 for about $700 million. Caterpillar blamed accounting "misconduct" by several former senior managers of the acquired company.
Write to James R. Hagerty at bob.hagerty@wsj.com and Bob Tita at robert.tita@wsj.com